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Personal Deductions

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Above-the-line deductions are subtracted from gross income to produce ' ... Electing to ... the standard deduction or elects to itemize, the taxpayer is ... – PowerPoint PPT presentation

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Title: Personal Deductions


1
Personal Deductions Credits
2
Provisions Relating to Deductions
  • Overlying provisions
  • 62 above-the-line deductions
  • 63 standard deduction/itemized deductions
  • 67 2 floor for miscellaneous itemized
    deductions
  • 68 overall limitation on itemized deductions

3
62 Above-the-Line Deductions
  • Above-the-line deductions are subtracted from
    gross income to produce adjusted gross income
  • Above-the-line deductions include the following
  • Trade or business deductions (including certain
    trade or business deductions of employees)
  • Losses from the sale or exchange of property
  • Deductions attributable to rents and royalties
  • Alimony
  • Moving expenses
  • Interest on educational loans

4
63 Taxable income
  • Section 63 gives a taxpayer two alternatives in
    getting from adjusted gross income to taxable
    income
  • Taking the standard deduction, or
  • Electing to itemize deductions.
  • Whether a taxpayer takes the standard deduction
    or elects to itemize, the taxpayer is also
    entitled to the personal exemption in
    calculating taxable income.

5
The 2007 Standard Deduction
  • Married taxpayers filing jointly 10,700
  • Unmarried individuals 5,350
  • Married taxpayers filing separately 5,350
  • Head of household 7,850
  • Note that the personal exemption was 3,400 in
    2007

6
67 Miscellaneous Itemized Deductions
  • Miscellaneous itemized deductions are all
    itemized deductions other than those listed in
    67(b).
  • Miscellaneous itemized deductions are only
    allowable to the extent that they exceed 2 of
    adjusted gross income.

7
67 Example
  • A makes 80,000 per year, is unmarried, and has
    no above-the-line deductions. A incurs 5,500 in
    unreimbursed expenses related to his employment.
  • What is As adjusted gross income?
  • 80,000 (no above-the-line deductions)
  • What is 2 of As adjusted gross income?
  • 1,600 (80,000 x 2)
  • What is the allowable deduction?
  • 3,900 (5,500 - 1,600)
  • If this is As only itemized deduction, should A
    itemize or take the standard deduction?

8
68 Overall Limitation
  • If an individuals adjusted gross income exceeds
    the applicable amount (generally 156,400 in
    2007),
  • Then the amount of the taxpayers otherwise
    allowable itemized deductions will be reduced by
    the lesser of
  • 3 of the excess of adjusted gross income over
    the applicable amount, or
  • 80 of the amount of the itemized deductions
    otherwise allowable for the taxable year.
  • Does not apply to deduction for medical
    expenses, investment interest, or certain losses.

9
68 Example
  • B has 250,000 of gross income
  • B has the following expenses
  • 5,000 in moving expenses
  • 10,000 in home mortgage interest
  • 8,000 in real estate taxes
  • 5,000 in charitable contribution deductions

10
68 Example
  • What is Bs adjusted gross income?
  • 245,000 (250,000 - 5,000 moving expenses)
  • What is the sum of otherwise allowable itemized
    deductions?
  • 23,000 (10,000 8,000 5,000)
  • How much is the reduction?
  • The lesser of
  • 2,658 (3 x (245,000 - 156,400)) or
  • 18,400 (80 x 23,000)
  • In 2007, the reduction is 2/3 of this amount, or
    1,773.
  • B deducts only 21,227 of these itemized
    deductions (23,000 - 1,773).

11
EITC Problem
  • Part (a)
  • Part (b)
  • Joes
  • Income tax liability (5,626)
  • Payroll tax liability 1,530
  • Marys
  • Income tax liability (95)
  • Payroll tax liability 765
  • Joe Marys
  • Net tax liability (3,426)
  • Joe Marys
  • Income tax liability (3,872)
  • Payroll tax liability 2,295
  • Net tax liability (1,575)

Difference 1,851
12
EITC Problem
  • Part (a)
  • Part (c)
  • Joe Marys
  • Income tax liability (3,872)
  • Payroll tax liability 2,295
  • Net tax liability (1,575)
  • Joe and Marys
  • Income tax liability (6,236)
  • Payroll tax liability 1,530
  • Net tax liability (4,706)

Difference 3,131
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